The First Global Economic Crisis in the 21st Century

Prabhakar, A. C., Political Economy Journal of India

Introduction

The global financial crisis has now become a full-fledged crisis of the real economy as much deeper than the 'Great Depression' in 1930s. The global recession has set in with all its ill effects on employment, loss of livelihood and houses for people around the world. The demand especially private consumption is daily being fall at national and international levels. Investment, output, employment and trade are falling sharply worldwide. Poverty is rising, the middle classes are threatened, and the wealthy and retirees find their assets shrinking dramatically.

According to latest 'World Economic Outlook' (Update in November 2008); the world economy will grow only at 1 percent in 2009. When the advanced economies are taken together it will experience a negative growth (-0.3 percent).

The US GDP is projected to contract by 0.7 percent, Euro Area GDP by 0.5 percent and UK GDP by 1.3 percent in 2009. According to the latest IMF report (Update in April, 2009); suggest that the world economy will grow only at 1 percent in 2009. The major two causes behind it: (I) the world-wide fall in demand and, (II) deep financial crisis in the advanced economy and all over the world for the long time. This will be the first annual contraction, i.e., absolute fall in output, experienced in the advanced economies in the post-war period. All the major capitalist Centers--USA, Europe and Japan--are simultaneously in recession. The unemployment rate in the US had already risen to 6.7 percent in November 2008, with 18.7,00,000 people jobs being lost there since November 2007. The unemployment rates in France and Germany had risen to 8.2 percent and 7.1 percent respectively by October 2008 (ILO). With the recession deepening in 2009, unemployment in the advanced capitalist economies would rise further.

The initial response of the Governments in the advanced capitalist countries to the financial crisis was to announce bailout packages for the financial companies, which had made enormous losses. Recapitalization of private financial institutions with public funds took the shape of part nationalization of several banks and financial companies. This was accompanied by coordinated interest rate cuts by Central Banks across the world. These financial and monetary policy measures, however, have failed to prevent a deepening recession. The Governments of the advanced capitalist countries are now falling back upon fiscal interventions to salvage the situation. Even the bastion of neo-liberal orthodoxy, the IMF, has recently called for a "large fiscal stimulus totaling 2 percent of global GDP", to address the crisis. While the $700 billion bailout package announced in the US in October 2008 was primarily meant to compensate the losses made by the private financial institutions and other corporate. It means each American will intervene with USD 2.25 thousand for helping to bail out firms threatened by the fall-out of the sub-prime crisis. However, the White House, the Treasury and the Federal Reserve, who were saying that intervention was inevitable to avoid a financial meltdown, were making the case for a specific kind of intervention that favored Wall Street. Having made huge profits on speculation Big Finance wanted the State to pick up the losses when the bubble burst.

After much debate between Britain and Germany, the EU has also adopted a nearly $ 280 billion fiscal package including tax cuts and public spending plans. The crisis is exposing the hazards of neo-liberal economic policies and the advanced capitalist countries are being compelled to resort to direct State intervention as the way out of the crisis. However, the extent of the crisis is such that these fiscal measures may turn out to be insufficient. There is also apprehension that the entire extent of financial losses by banks and other private companies are yet to be revealed. More financial shocks would only aggravate the crisis and worsen the prospects of economic recovery. …

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